Carragee Consulting

Kahneman has passed, but his ideas live on

With Kahneman’s passing I finally started listening to his book Noise: a flaw in human judgement.

You may be familiar with oracle Nate Silver’s book the Signal and the Noise or the concept of measuring noise statistically in systems, but have you really thought about how influential it is in our lives?

The book begins with reviewing some academic studies on the variation in sentences from judges for similar cases and insurance valuation by experts.

The intro chapter calls to mind the dad from the Incredibles working in a soul sucking job as an insurance adjuster whose boss is infuriated by his willingness to show customers how to get their policy benefits applied when needed.

Insurance companies have highly educated actuaries who base their policy pricing off risk tables and historical data. Their jobs are highly quantitative and theoretically with the same information within a company expert adjusters would price policies within a small margin of error compared with their colleagues.

In reality, pricing ranges from extremely high, (causing customers to go with competitors), to way too low (necessitating claims payouts vastly exceeding premium income).

On average the mix of individuals pricing policies may be quoting reasonable prices, but the effects of their errors don’t cancel each other out, they accumulate into billions of dollars of lost revenue and margin.

Extrapolating…
these insurance scenarios are generally more data driven than B2B large deal negotiations. If there is a ton of costly noise in that arena, what hope is there to agree on and reduce unexplained variability in pricing with more qualitative evaluation criteria and less historical data?